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Asset recognition criteria

Which company should book the asset when there is a middle-company involved for finance?

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Company A takes out a hire purchase agreement on a new van. This is not used by them but instead they took out the finance on behalf of Company B (like a financial intermediary company). So Company A  invoices company B for rental payments monthly. In this case, if company B is the "actual owner" and controls the asset, should the asset be shown on Company A or Company B? 

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By paul.benny
23rd Apr 2021 14:37

A is the legal owner and should recognise asset as a lessor.
Depending on the terms of the lease agreement, B should either capitalise as a leased asset or treat rentals as an operating lease.

That said, I'm not sure what you mean by comparing it to a financial intermediary. That usually means IFA or the like who arrange transactions on behalf of others - not who are directly party to them as per the arrangement you appear to be describing.

It's not the question asked, so on this occasion I won't ask whether this arrangement is permitted by the terms of the HP contract, whether the insurance policy actually covers use by B, or whether both A and B are VAT registered.

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By tom123
23rd Apr 2021 14:44

It's not the question asked, so on this occasion I won't ask whether this arrangement is permitted by the terms of the HP contract, whether the insurance policy actually covers use by B, or whether both A and B are VAT registered.

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But it would be interesting if you did

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By Ravi Sorathiya
23rd Apr 2021 14:49

Technically, the asset is owned & operated by Company B although Co A might be the legal owner. But from my understanding, accounting transactions should be recorded with the principle of substance over form to reflect the real scenario. In this case, since most of the benefits out of that van are derived by Co B and the insurance, drivers are all under Co B, should the asset be not shown on Co B as opposed to Co A?

What I meant to say by financial intermediary is, Co A just serves as a tool to raise the finance for the van and then recovers the cost of same from Co B.

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By paul.benny
23rd Apr 2021 15:46

Ravi Sorathiya wrote:
...accounting transactions should be recorded with the principle of substance over form to reflect the real scenario..

That's what lease accounting does.

But you need to understand the agreement by which B uses the vehicle. If there is nothing documented, what's to prevent B handing the van back to A, who is the legal owner (or at least the person who will become owner under the HP contract). And if there is no documentation to the contrary, B doesn't have substantially all of the risks and rewards of ownership. B has a short term hire at will.

And btw, leased asset can be in the balance sheet of two companies at once: once in the legal owner and once in the substantive owner.

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By tom123
23rd Apr 2021 15:55

Plus, the vehicle insurance angle is not one to be overlooked.

(having worked in companies with vehicle fleets of all types for many years)

If I was a director, I would want to be very certain that all my vehicles, drivers and goods were correctly covered on my insurance.

You do not want to find a problem when one of your vehicles is already in the hedge.

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By Paul Crowley
23rd Apr 2021 16:20

A & B are related
Why else would A take on the liability for B
B cannot get credit
Why else would A take on the liability for B

Consider carefully any actions that would mislead potential entities giving credit to B
Cos B cannot be trusted with a simple HP agreement where the van is still property of the lender

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